Farming groups are raising concerns about wealthy businesspeople potentially abusing the inheritance tax system through agricultural land transactions. According to recent reports, these groups are warning that the current framework may be vulnerable to exploitation by super-rich individuals seeking to minimize their tax obligations through strategic land inheritance and sales.
Inherited agricultural land can attract capital gains tax if it qualifies as urban agricultural land, but several tax exemption options are available to reduce the tax burden. According to tax expert Mahesh Nayak from CNK & Associates, each beneficiary may claim exemption under Section 54F for reinvestment in residential property or under Section 54B for purchasing agricultural land, assuming the inherited land was cultivated by the deceased owner. The exemption under Section 86 requires investment in residential property within one year before or two years after the land sale, with construction completion within three years if self-constructed, and the amount eligible for exemption is capped at ₹10 crore.
For Section 54B, agricultural land investment must be made within two years of the sale, with the newly acquired land held for at least three years from purchase. Each beneficiary can invest separately rather than jointly, though Section 54F allows exemption for only one residential property per person. The exemption under Section 54B is available provided the siblings do not own more than one residential property other than the new property on the date of transfer of the agricultural land.
If capital gains remain taxable after exemptions, beneficiaries can choose between 12.5% plus applicable surcharge and education cess on non-indexed gains or 20% plus applicable surcharge and education cess on indexed gains. The indexation period includes the time the father held the land, with the cost of acquisition generally being the amount paid by the father. For land acquired before 1 April 2001, fair market value as of 1 April 2001 can be used instead.
Alternative exemption is available under Section 54EC by investing capital gains in specified capital gains bonds, capped at ₹50 lakh. The exemption is available provided the land is located within specified municipal or cantonment board limits, and all beneficiaries must be tax residents of India. If the land is located beyond these specified limits, capital gains from its sale would not be taxable.
